Bank Capital and Uncertainty

Bank Capital and Uncertainty

Author: Mr.Fabian Valencia

Publisher: International Monetary Fund

Published: 2010-09-01

Total Pages: 24

ISBN-13: 1455205397

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An important role for bank capital is that of a buffer against unexpected losses. As uncertainty about these losses increases, the theory predicts an increase in the optimal level of bank capital. This paper investigates this implication empirically with U.S. Commercial Banks data and finds statistically significant and robust evidence supporting it. A counterfactual experiment suggests that a decline in uncertainty to the lowest level measured in the sample generates an average reduction in bank capital ratios of slightly over 1 percentage point. However, I also find suggestive evidence that the intensity of this precautionary motive is stronger during recessions. From a policy perspective, these results suggest that the effectiveness of countercyclical capital requirements during bad times will be undermined by banks desire to hold more capital in response to increased uncertainty.


Book Synopsis Bank Capital and Uncertainty by : Mr.Fabian Valencia

Download or read book Bank Capital and Uncertainty written by Mr.Fabian Valencia and published by International Monetary Fund. This book was released on 2010-09-01 with total page 24 pages. Available in PDF, EPUB and Kindle. Book excerpt: An important role for bank capital is that of a buffer against unexpected losses. As uncertainty about these losses increases, the theory predicts an increase in the optimal level of bank capital. This paper investigates this implication empirically with U.S. Commercial Banks data and finds statistically significant and robust evidence supporting it. A counterfactual experiment suggests that a decline in uncertainty to the lowest level measured in the sample generates an average reduction in bank capital ratios of slightly over 1 percentage point. However, I also find suggestive evidence that the intensity of this precautionary motive is stronger during recessions. From a policy perspective, these results suggest that the effectiveness of countercyclical capital requirements during bad times will be undermined by banks desire to hold more capital in response to increased uncertainty.

Aggregate Uncertainty and the Supply of Credit

Aggregate Uncertainty and the Supply of Credit

Author: Mr.Fabian Valencia

Publisher: International Monetary Fund

Published: 2013-12-02

Total Pages: 26

ISBN-13: 1475513933

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Recent studies show that uncertainty shocks have quantitatively important effects on the real economy. This paper examines one particular channel at work: the supply of credit. It presents a model in which a bank, even if managed by risk-neutral shareholders and subject to limited liability, can exhibit self-insurance, and thus loan supply contracts when uncertainty increases. This prediction is tested with the universe of U.S. commercial banks over the period 1984-2010. Identification of credit supply is achieved by looking at the differential response of banks according to their level of capitalization. Consistent with the theoretical predictions, increases in uncertainty reduce the supply of credit, more so for banks with lower levels of capitalization. These results are weaker for large banks, and are robust to controlling for the lending and capital channels of monetary policy, to different measures of uncertainty, and to breaking the dataset in subsamples. Quantitatively, uncertainty shocks are almost as important as monetary policy ones with regards to the effects on the supply of credit.


Book Synopsis Aggregate Uncertainty and the Supply of Credit by : Mr.Fabian Valencia

Download or read book Aggregate Uncertainty and the Supply of Credit written by Mr.Fabian Valencia and published by International Monetary Fund. This book was released on 2013-12-02 with total page 26 pages. Available in PDF, EPUB and Kindle. Book excerpt: Recent studies show that uncertainty shocks have quantitatively important effects on the real economy. This paper examines one particular channel at work: the supply of credit. It presents a model in which a bank, even if managed by risk-neutral shareholders and subject to limited liability, can exhibit self-insurance, and thus loan supply contracts when uncertainty increases. This prediction is tested with the universe of U.S. commercial banks over the period 1984-2010. Identification of credit supply is achieved by looking at the differential response of banks according to their level of capitalization. Consistent with the theoretical predictions, increases in uncertainty reduce the supply of credit, more so for banks with lower levels of capitalization. These results are weaker for large banks, and are robust to controlling for the lending and capital channels of monetary policy, to different measures of uncertainty, and to breaking the dataset in subsamples. Quantitatively, uncertainty shocks are almost as important as monetary policy ones with regards to the effects on the supply of credit.

Uncertainty and Investment

Uncertainty and Investment

Author: Sophia Chen

Publisher: International Monetary Fund

Published: 2015-03-20

Total Pages: 30

ISBN-13: 1475594038

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Rollover risk imposes market discipline on banks’ risk-taking behavior but it can be socially costly. I present a two-sided model in which a bank simultaneously lends to a firm and borrows from the short-term funding market. When the bank is capital constrained, uncertainty in asset quality and rollover risk create a negative externality that spills over to the real economy by ex ante credit contraction. Macroprudential and monetary policies can be used to reduce the social cost of market discipline and improve efficiency.


Book Synopsis Uncertainty and Investment by : Sophia Chen

Download or read book Uncertainty and Investment written by Sophia Chen and published by International Monetary Fund. This book was released on 2015-03-20 with total page 30 pages. Available in PDF, EPUB and Kindle. Book excerpt: Rollover risk imposes market discipline on banks’ risk-taking behavior but it can be socially costly. I present a two-sided model in which a bank simultaneously lends to a firm and borrows from the short-term funding market. When the bank is capital constrained, uncertainty in asset quality and rollover risk create a negative externality that spills over to the real economy by ex ante credit contraction. Macroprudential and monetary policies can be used to reduce the social cost of market discipline and improve efficiency.

Managing Banking Risks

Managing Banking Risks

Author: Eddie Cade

Publisher: Routledge

Published: 2013-11-26

Total Pages: 254

ISBN-13: 1135952140

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Banking and financial services are some of the fastest-growing industries in the world's developed countries. As growth is spurred on by huge demand for new and improved services, bankers face the daunting and difficult challenges of reducing risks and uncertainty at a time of unprecedented innovation and prosperity. Managing Banking Risks fills a gap in banking literature by providing a professional and sophisticated risk planner--for bank directors, executives, and managers at every operational level. This important work covers the full range of banking risks that operation managers and executives need to understand--from liquidity risk to price risk to operating risk.


Book Synopsis Managing Banking Risks by : Eddie Cade

Download or read book Managing Banking Risks written by Eddie Cade and published by Routledge. This book was released on 2013-11-26 with total page 254 pages. Available in PDF, EPUB and Kindle. Book excerpt: Banking and financial services are some of the fastest-growing industries in the world's developed countries. As growth is spurred on by huge demand for new and improved services, bankers face the daunting and difficult challenges of reducing risks and uncertainty at a time of unprecedented innovation and prosperity. Managing Banking Risks fills a gap in banking literature by providing a professional and sophisticated risk planner--for bank directors, executives, and managers at every operational level. This important work covers the full range of banking risks that operation managers and executives need to understand--from liquidity risk to price risk to operating risk.

Usability of Bank Capital Buffers: The Role of Market Expectations

Usability of Bank Capital Buffers: The Role of Market Expectations

Author: José Abad

Publisher: International Monetary Fund

Published: 2022-01-28

Total Pages: 61

ISBN-13: 1616358939

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Following the COVID shock, supervisors encouraged banks to use capital buffers to support the recovery. However, banks have been reluctant to do so. Provided the market expects a bank to rebuild its buffers, any draw-down will open up a capital shortfall that will weigh on its share price. Therefore, a bank will only decide to use its buffers if the value creation from a larger loan book offsets the costs associated with a capital shortfall. Using market expectations, we calibrate a framework for assessing the usability of buffers. Our results suggest that the cases in which the use of buffers make economic sense are rare in practice.


Book Synopsis Usability of Bank Capital Buffers: The Role of Market Expectations by : José Abad

Download or read book Usability of Bank Capital Buffers: The Role of Market Expectations written by José Abad and published by International Monetary Fund. This book was released on 2022-01-28 with total page 61 pages. Available in PDF, EPUB and Kindle. Book excerpt: Following the COVID shock, supervisors encouraged banks to use capital buffers to support the recovery. However, banks have been reluctant to do so. Provided the market expects a bank to rebuild its buffers, any draw-down will open up a capital shortfall that will weigh on its share price. Therefore, a bank will only decide to use its buffers if the value creation from a larger loan book offsets the costs associated with a capital shortfall. Using market expectations, we calibrate a framework for assessing the usability of buffers. Our results suggest that the cases in which the use of buffers make economic sense are rare in practice.

International Convergence of Capital Measurement and Capital Standards

International Convergence of Capital Measurement and Capital Standards

Author:

Publisher: Lulu.com

Published: 2004

Total Pages: 294

ISBN-13: 9291316695

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Book Synopsis International Convergence of Capital Measurement and Capital Standards by :

Download or read book International Convergence of Capital Measurement and Capital Standards written by and published by Lulu.com. This book was released on 2004 with total page 294 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Bank Liquidity Creation and Financial Crises

Bank Liquidity Creation and Financial Crises

Author: Allen N. Berger

Publisher: Academic Press

Published: 2015-11-24

Total Pages: 296

ISBN-13: 0128005319

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Bank Liquidity Creation and Financial Crises delivers a consistent, logical presentation of bank liquidity creation and addresses questions of research and policy interest that can be easily understood by readers with no advanced or specialized industry knowledge. Authors Allen Berger and Christa Bouwman examine ways to measure bank liquidity creation, how much liquidity banks create in different countries, the effects of monetary policy (including interest rate policy, lender of last resort, and quantitative easing), the effects of capital, the effects of regulatory interventions, the effects of bailouts, and much more. They also analyze bank liquidity creation in the US over the past three decades during both normal times and financial crises. Narrowing the gap between the "academic world" (focused on theories) and the "practitioner world" (dedicated to solving real-world problems), this book is a helpful new tool for evaluating a bank’s performance over time and comparing it to its peer group. Explains that bank liquidity creation is a more comprehensive measure of a bank’s output than traditional measures and can also be used to measure bank liquidity Describes how high levels of bank liquidity creation may cause or predict future financial crises Addresses questions of research and policy interest related to bank liquidity creation around the world and provides links to websites with data and other materials to address these questions Includes such hot-button topics as the effects of monetary policy (including interest rate policy, lender of last resort, and quantitative easing), the effects of capital, the effects of regulatory interventions, and the effects of bailouts


Book Synopsis Bank Liquidity Creation and Financial Crises by : Allen N. Berger

Download or read book Bank Liquidity Creation and Financial Crises written by Allen N. Berger and published by Academic Press. This book was released on 2015-11-24 with total page 296 pages. Available in PDF, EPUB and Kindle. Book excerpt: Bank Liquidity Creation and Financial Crises delivers a consistent, logical presentation of bank liquidity creation and addresses questions of research and policy interest that can be easily understood by readers with no advanced or specialized industry knowledge. Authors Allen Berger and Christa Bouwman examine ways to measure bank liquidity creation, how much liquidity banks create in different countries, the effects of monetary policy (including interest rate policy, lender of last resort, and quantitative easing), the effects of capital, the effects of regulatory interventions, the effects of bailouts, and much more. They also analyze bank liquidity creation in the US over the past three decades during both normal times and financial crises. Narrowing the gap between the "academic world" (focused on theories) and the "practitioner world" (dedicated to solving real-world problems), this book is a helpful new tool for evaluating a bank’s performance over time and comparing it to its peer group. Explains that bank liquidity creation is a more comprehensive measure of a bank’s output than traditional measures and can also be used to measure bank liquidity Describes how high levels of bank liquidity creation may cause or predict future financial crises Addresses questions of research and policy interest related to bank liquidity creation around the world and provides links to websites with data and other materials to address these questions Includes such hot-button topics as the effects of monetary policy (including interest rate policy, lender of last resort, and quantitative easing), the effects of capital, the effects of regulatory interventions, and the effects of bailouts

Uncertainty and Cross-Border Banking Flows

Uncertainty and Cross-Border Banking Flows

Author: Sangyup Choi

Publisher: International Monetary Fund

Published: 2018-01-05

Total Pages: 51

ISBN-13: 1484336933

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While global uncertainty—measured by the VIX—has proven to be a robust global “push” factor of international capital flows, there has been no systematic study assessing the role of country-specific uncertainty as a key (pull and push) factor of international capital flows. This paper tries to fill this gap in the literature by examining the effects of country-specific uncertainty shocks on cross-border banking flows using the confidential Bank for International Settlements Locational Banking Statistics data. The dyadic structure of this data allows to disentangle supply and demand factors and to better identify the effect of uncertainty shocks on cross-border banking flows. The results of this analysis suggest that: (i) uncertainty is both a push and pull factor that robustly predicts a decrease in both outflows (retrenchment) and inflows (stops); (ii) global banks rebalance their lending towards safer foreign borrowers from local borrowers when facing higher uncertainty; (iii) this rebalancing occurs only towards advanced economies (flight to quality), but not emerging market economies.


Book Synopsis Uncertainty and Cross-Border Banking Flows by : Sangyup Choi

Download or read book Uncertainty and Cross-Border Banking Flows written by Sangyup Choi and published by International Monetary Fund. This book was released on 2018-01-05 with total page 51 pages. Available in PDF, EPUB and Kindle. Book excerpt: While global uncertainty—measured by the VIX—has proven to be a robust global “push” factor of international capital flows, there has been no systematic study assessing the role of country-specific uncertainty as a key (pull and push) factor of international capital flows. This paper tries to fill this gap in the literature by examining the effects of country-specific uncertainty shocks on cross-border banking flows using the confidential Bank for International Settlements Locational Banking Statistics data. The dyadic structure of this data allows to disentangle supply and demand factors and to better identify the effect of uncertainty shocks on cross-border banking flows. The results of this analysis suggest that: (i) uncertainty is both a push and pull factor that robustly predicts a decrease in both outflows (retrenchment) and inflows (stops); (ii) global banks rebalance their lending towards safer foreign borrowers from local borrowers when facing higher uncertainty; (iii) this rebalancing occurs only towards advanced economies (flight to quality), but not emerging market economies.

Banks, Capital Markets and Uncertainty

Banks, Capital Markets and Uncertainty

Author: Arpan Sengupta

Publisher:

Published: 2004

Total Pages: 436

ISBN-13:

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This thesis provides theoretical and empirical analyses of the uncertainty associated with capital market investment in the context of economic growth. First, it develops an overlapping generations (OLG) model framework, comprising both banks and capital markets, that can be used to endogenously examine the influence of capital market return uncertainty on the finance-growth relationship. It explicitly derives the equilibrium allocation of resources and resultant economic growth for a 'deterministic' set-up (that assumes zero capital market return variances) and provides a framework and partial results for the 'stochastic' optimization extension (that relaxes this assumption).


Book Synopsis Banks, Capital Markets and Uncertainty by : Arpan Sengupta

Download or read book Banks, Capital Markets and Uncertainty written by Arpan Sengupta and published by . This book was released on 2004 with total page 436 pages. Available in PDF, EPUB and Kindle. Book excerpt: This thesis provides theoretical and empirical analyses of the uncertainty associated with capital market investment in the context of economic growth. First, it develops an overlapping generations (OLG) model framework, comprising both banks and capital markets, that can be used to endogenously examine the influence of capital market return uncertainty on the finance-growth relationship. It explicitly derives the equilibrium allocation of resources and resultant economic growth for a 'deterministic' set-up (that assumes zero capital market return variances) and provides a framework and partial results for the 'stochastic' optimization extension (that relaxes this assumption).

Investment, Capital Market Imperfections, and Uncertainty

Investment, Capital Market Imperfections, and Uncertainty

Author: Robert Lensink

Publisher: Edward Elgar Publishing

Published: 2001-01-01

Total Pages: 176

ISBN-13: 9781782541240

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This book presents an up-to-date overview of the theory as well as the empirics of the relationship between investment, financial imperfections and uncertainty. After reviewing the capital market imperfections literature and the empirical results, the authors discuss both traditional investment models with uncertainty and the more modern option based models. They present an overview of empirical results of the modelling of investment under uncertainty. In these examples the effects of capital market imperfections on investment are carefully considered. The authors conclude that there is overwhelming empirical support for a negative uncertainty-investment relationship. This book should appeal to academics with an interest in investment theory, professionals in the financial sector and students of macroeconomics and finance. "Investment, Capital Market Imperfections, and Uncertainty" assumes only a basic knowledge of mathematics and is easily accessible.


Book Synopsis Investment, Capital Market Imperfections, and Uncertainty by : Robert Lensink

Download or read book Investment, Capital Market Imperfections, and Uncertainty written by Robert Lensink and published by Edward Elgar Publishing. This book was released on 2001-01-01 with total page 176 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book presents an up-to-date overview of the theory as well as the empirics of the relationship between investment, financial imperfections and uncertainty. After reviewing the capital market imperfections literature and the empirical results, the authors discuss both traditional investment models with uncertainty and the more modern option based models. They present an overview of empirical results of the modelling of investment under uncertainty. In these examples the effects of capital market imperfections on investment are carefully considered. The authors conclude that there is overwhelming empirical support for a negative uncertainty-investment relationship. This book should appeal to academics with an interest in investment theory, professionals in the financial sector and students of macroeconomics and finance. "Investment, Capital Market Imperfections, and Uncertainty" assumes only a basic knowledge of mathematics and is easily accessible.